Q3 2019 Earnings Call
<unk>, France, especially to begin momentarily until that time Airlines will again be placed on musical. Thank you for your patience.
In the call today for one main it's Kathryn Miller head of Investor Relations.
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It's now my pleasure to turn the floor over to Kathryn Miller you may begin.
Thank you Maria good morning, and thank you for joining us.
Maybe just by directing you to he just two and three of the third quarter 2019, investor presentation, which contain important disclosures concerning forward looking statements on the use of non-GAAP measure the presentation can be found in the Investor Relations section of our website.
Our discussion today will contain certain forward looking statements, reflecting management's current beliefs about the company's future financial performance and business prospects.
These forward looking statements are subject to inherent risks and uncertainties and speak only as of today.
Factors that could cause actual results to differ materially from these forward looking statements are set forth in our earnings press release.
We caution you not to place undue reliance on forward looking statements.
If you may be listening to this via replay at some point. After today, we remind you that the remarks made herein are as of today October 29, and have not been updated subsequent to this call.
Our call. This morning will include formal remarks from Doug Shulman, <unk>, President and CEO and make a Conrad our chief financial officer. After the conclusion over formal remarks, we'll conduct a queuing <unk> session. So now let me turn the call over to Dot.
Thanks, Catherine and good morning, everyone I'm pleased to be whether you today.
We produced significant earnings growth during the third quarter driven by the continued execution of our strategic priorities for the year and our ongoing commitment to enhance our customer experience.
We generated cnine adjusted earnings growth, 35% year over year and drove a 90 basis point improvement in our return on receivables, which reached 5.5% for the quarter.
Credit performance continued to be strong our net charge off rate was 5.2% about 60 basis points better than last year's third quarter.
Our 30 to 89 day delinquency ratio was flat year over year, and our 90 day ratio came in about 10 basis points better than last year.
We're also continuing to exercise expense discipline and driving operating leverage in our business. Our third quarter operating expense ratio declined by about 60 basis points year over year, even as we continue to invest in the business.
From a funding perspective, we issued a total of $1.7 billion up seven year revolving secured debt at a blended interest rate of about 3.5%. This was an important milestone for our funding program as we became the first ever personal lender.
To complete a seven year revolving securitization.
Very committed to maintaining a conservative balance sheet and significant liquidity cushion.
Overall, the core drivers of our business are performing very well and reflecting the benefit of the initiatives, we've undertaken to enhance our customer experience and the profitability of the platform.
We're using advanced analytics to optimize our marketing strategy and drive our credit model, our streamlined application our expanded after hours support and our build out of analytics tools all of our all improving our customer pull through.
And our investment in technology is driving greater productivity across our branch and central operations teams simply put we are attracting converting and serving more of the customers that we want to serve.
This is contributed to the strong originations growth we've achieved over the last two quarters in particular.
We're excited to talk about these and other initiatives at our upcoming Investor Day will provide an overview of our longer term plans for the company, including enhanced digital capabilities and a number of opportunities we see to further optimize our business better serve our customers.
And enhance profitability, we will also provide insight into the resilience of our business, regardless of the economic environment and discuss our reinvestment and capital return priorities. We look forward. The scene you all there with that let me turn the call over to Mike.
Thanks, Doug and good morning, everyone I'll start by reviewing the core drivers of our third quarter results, followed with some comments on Cecil and its expected impact.
We are in 248 million of net income in the third quarter or $1.82 per diluted share primarily driven by our strong seeking to high performance.
Income for the quarter included the benefit of 22 million of nonrecurring discrete tax items as a result of these tax items. We now expect non see an eye impacts to be about 70 million for the full year 2019 down from the 90 million I guided to during our first quarter conference call.
I see a nice segment earned 241 million on an adjusted net income basis or dollar 77 per diluted share.
This was up 35% from 179 million or $1.31 in the third quarter of 2018.
Originations for the third quarter was 3.7 billion of which 55%. It was secured up from 2.9 billion and 54% secured last year.
These strong originations led to ending net receivables growth of 2 billion year over year.
Our secured portfolio grew by 1.9 billion or 26% over the same period, reflecting our continued focus on building a resilient portfolio that will continue to perform and all economic conditions.
Given the growth we've achieved thus far we're now expecting ending net receivables growth for the year to be between 12 and 14%.
Interest income was 1.1 billion.
Up 13% from last year, the increase primarily reflected higher average receivables and higher yield which was 24.1% in the third quarter.
The year over year, increasing yield reflect an improvement in our 90 day delinquencies and continued strength in origination A.P. ours.
These positive dynamics continue to provide stability in our yields despite continued growth in our secured portfolio mix.
Total other revenue was 154 million in the third quarter up 10% versus last year, consistent with our originations and receivables growth.
Let's move on to credit, which continued to be stable.
Our 30 to 89 delinquency rate of 2.3% remain consistent with last year's third quarter.
Our 90, plus delinquency rate was 1.9% down about 10 basis points from last year.
And our net charge off ratio was 5.2% an approximate 60 basis point improvement compared to last year.
Keep in mind. This was driven by a particularly strong 30 to 89 delinquency rate in the first quarter of this year.
We do not expect year over year improvements of this same magnitude in future quarters, given the portfolios moderating growth of secured lending.
Our loan loss reserves increased sequentially by $50 million or by 10 basis points to 4.6% of receivables. This increase was inline with expectations and reflected seasonally higher delinquency.
Our reserve rate was down 20 basis points year over year, driven by the lower loss profile of our portfolio compared to last year.
Third quarter operating expenses were 335 million.
5% higher than last year.
On a year to date basis expenses were 963 million up 3% versus 2018.
This increase reflected continued investment in technology customer experience and customer acquisition, which has been partially offset by continued operating efficiency in our branches and our central operations year to date, our operating expense ratio was 7.7% down about 50 basis point.
It's from the comparable period last year.
And lastly interest expense was 238 billion in the third quarter up from 218 million a year ago.
Consistent with prior quarters increase reflected higher average debt balances to support our portfolio growth as well as a greater proportion of unsecured debt.
Let's move onto our balance sheet.
As you know our priority is to maintain a conservative balance sheet and a long liquidity runway.
Both of which we continued to enhance during the quarter as Doug mentioned, we issued 1.7 billion of secured debt through two seven year revolving securitizations at a blended rate of 3.5%.
As a result of this longer issuance the average tenor of our secured debt maturities is now about three years up from two years at the end of 2016.
Our third quarter tangible leverage ratio was 6.8 times and we are well positioned to deliver on our target of six times by yearend.
As you all know we're a wholesale funded business that regularly accesses the capital markets to prefund upcoming maturities and growth.
As a result, our cash levels fluctuate from quarter to quarter, reflecting the timing differences between debt issuance receivables growth and debt redemptions.
We ended the third quarter, we had roughly 1.2 billion of available and excess cash net of this available cash our leverage ratio was about 6.3 times for the quarter.
In terms of liquidity during the quarter, we expanded our undrawn capacity to 6.9 billion.
In addition to the 1.2 billion of available cash on our balance sheet. We also had 8.5 billion of unencumbered assets at quarter end. These liquidity sources, along with our balanced and longer maturities provide an extended runway to operate our business without access to the capital markets.
Now, let's move on to season.
As you all know Cecil requires us to move away from our current incurred loss reserving to a lifetime projected loss methodology.
Keep in mind. This is simply an accounting change and does not affect the cash flow more fundamental economics of the business.
Accordingly, when we adopt Cecil on January Onest 2020 , we expect our reserve ratio to increase from the current 4.6% to between 10 and 11%.
This estimate is reflective of the portfolio attributes and economic outlook as of September Thirtyth.
The ultimate ultimate amount that will be recorded on January onest will be dependent on our portfolio composition and economic outlook at that time.
Reserve builds will be accompanied by an increase to our deferred tax asset of approximately 24%. The net of these two resulting in an offsetting reduction to retained earnings.
As we've highlighted in the past, we've always viewed reserves and tangible equity as the combined loss absorption capacity for the business Cecil simply moves this capital from one account to the other with the aggregate amount remaining the same.
Unlike a bank regulatory agencies do not govern our capital levels, we see our balance sheet is very well capitalized regardless of the seasonal accounting change and do not anticipate it having any impact on our capital adequacy or ability to invest in the business or return capital to shareholders.
Let me finish by saying this.
Seasonal is purely an accounting change it does not impact fundamental drivers are underlying economics of our business.
Our business generates very attractive returns and a considerable amount of capital for reinvestment and shareholder returns and we remain well capitalized with significant liquidity to run the business through all economic conditions.
With that I'll turn the call back to Doug.
Thanks, Mike.
As you can see we continue to drive very strong results are key metrics, whether it be earnings return on receivables losses or liquidity are great.
What really excites me is the underlying fundamentals of the business and initiatives that are gaining momentum and driving these great financial results.
We have a world class executive team that is working extremely well together and are totally aligned against the company's priorities. We are hyper focused on our customers and recently surpassed 2.4 million customer accounts for the first time in the company's history.
As a result up a number of factors, including.
Finally tuned credit box that allows us to better target customers that meet our risk return profile marketing optimization that is starting to pay off with more customers applying who meet our risk return criteria and operational and customer experience.
Prove men that have more customers, who we approved for alone booking those loans with us once they start the process and interact with us.
I look forward to discussing these and other initiatives in plans with you at our upcoming Investor day with that let me. Thank all of you for joining us and I'll turn the call over to the operator for questions.
Thank you Sir the floor is now open for questions. At this time, if you'd have a question or comment. Please press star one on your Touchtone phone.
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And thank you our first question coming from the line of Kevin Barker of Piper Jaffray.
Thank you I'm just a follow up on your comments about the net charge off rate and the stabilization of that going forward.
What point do you think the portfolio will be basically stabilized between secured and unsecured and at what point do you feel like net charge offs, we'll start to stabilize in a range given given the balance between secured and unsecured.
Good morning, Kevin's Mike.
Thanks for your question.
Had you as we called out in the script, we can see our our portfolio has started to level off a little bit I mean, it's going up by about one percentage point per quarter. If you look over the last few quarters.
Originations at around 55 in that portfolio at 51, as you could imagine mathematically thats going to converge.
And I'll remind everyone over the last few years. The secured mix has really moved from 36% at the end of 2016 to where it is today 51, so it's been a pretty market ship and losses over that point in time have declined from 7%.
In 2017 down to our current range of 6.1 to 6.3, which we still feel good about but secured mix is moderating. So we would expect a loss improvement will also moderate we're not ready to call. It anything for 2020 yet.
But you can see in the delinquency trends if you look over the last couple of quarters.
30 to 89 delinquency rate has been flat to the prior year. So the portfolio remains really strong we really feel good about it but the secured mixes moderating and as such will the will the losses.
Okay, and then at what point do you feel like you're going to hit that stabilized where do you think it's probably sometime in mid 2020 or later in 2020, just given that mix shift.
Hard to say announcement right, we're not calling up 2020, yet, but I would directly back to the delinquency trends.
Okay. Thanks for taking my question.
Thanks.
Our next question comes from one of Michael Kaye of Wells Fargo.
Hi, good morning on Cecil how should we think it bounce provision expense post Cecil versus under the current GAAP accounting any thoughts on that and also an early thoughts on if you plan to give some additional pro forma EPS metrics post Cecil just to normalize some of that noise around the purpose in expense.
Yes, good morning, Michael Thanks, So just just to back up on seasonal and R&D One reserve build that we called out again, it's we're going to we're expecting at this point.
Our current reserving to go from 4.6% as a ratio of receivables upwards to a range of between 10 and 11%. We're running about 40 models undersea saw we incorporate up to 20 low level attributes in a variety of macroeconomic variables I would caution.
That our current estimate is reflective of our portfolio attribute and the macroeconomic outlook as of today or September thirtyth.
Ultimately what we report on January one will be dependent on portfolio composition and macro views at that time with respect to the day, two or earnings impact going forward.
One other things about seasonal that's different from our current reserving methodology is really the sensitivity of that model and how it reacts to.
The.
Different things are going on the portfolio. So in general reserve changes under Cecil will be more sensitive to portfolio growth.
And less sensitive to seasonal delinquency than our current reserving methodology and there's a few drivers under Cecil that will impact the quarterly provision.
First in a growing portfolio there will be an increased level of reserving versus the methodology. We have today just by virtue of having that tend to 11% versus 4.6.
Second again the comes the composition and attributes of the portfolio or are very important at any given quarter that'll have a larger impact on the provision when projecting losses on a life of loan basis.
And third of course, as we've mentioned the macroeconomic conditions will drive future loss forecast is exits that can create fluctuation in the reserves. You know again this is a cutting change only.
As we mentioned and talked about a lot the fundamental economics of the business don't change.
And in terms of the future. We we've got a few quarters of parallel testing on our belt, we feel really good about where we are with c. So it's a little premature for us to guide around that expected earnings impact quite yet, but in future calls, we'll provide more clarity on this as well as a non-GAAP metrics to allow for year over year compares.
Since with 19 financials. Okay. Thank you I'm, just giving you a carrying a lot of that excess cash Tim anything you could see about dumb.
So you should not to pay down that 1 billion of unsecured due in December 2020, I think it has.
No quarter, a coupon I wasn't sure if you're waiting for a specific data to pay that down or if that's the plan.
Yeah, I don't have any specific comments on that Michael I'm in the billion that we have on the balance sheet was really a result of our $1.7 billion, a very very successful ABS issuance.
As we mentioned that is at about 3.5%, which is very very attractive funding for us.
We will tend to.
Access to markets when they're supportive and as you know we raise about $4 billion a year just to run the business grow and and satisfy our maturities nothing specific on next year's maturity that.
As of December .
Okay. Thank you.
Cycle.
Our next question comes from line from John .
Jefferies.
Morning, guys. Thanks, very much for taking my questions I guess kind of.
How are you guys I think the first one is what do you guys think is driving incremental growth growth.
Market share gains is it your borrowers the more willing to take on more credit we did just growth overall macroeconomic trends.
Yeah.
Look it's I think a number of things first of all the business is performing well and you're seeing the benefit of a number of initiatives that we started in the fourth quarter and first of last year in the fourth first quarter. This year, we haven't marketing efforts that are driving more cut.
Customers that we want to apply for loans to apply for those loans.
We're using advanced analytics to help refine our understanding of the total lifetime value of a customer when they come in the door, which helps us approved customers that have the right risk adjusted returns.
I mentioned on the last call we have a streamlined application we've expanded our after hours central support and we build out a number of analytical tools, which are all helping with the customer pull through and our investments in technology.
Are starting to pay off and drive better efficiency and productivity.
Cross our branch in central operations, So yes.
A piece of the driver is these initiatives that are resulting us attracting and converting more of the customers we want to convert.
However, the mix shift that Mike talked about earlier, which is usually for a larger secured loan than an unsecured loan has also been.
A driver and so I think between the two of those both the trends.
Oh, that's attracting the right customer and doing a good job operationally and with marketing at all throughout our processes together with.
More customers are choosing a secured loan at this point those are to the two main drivers of the growth.
Okay Thats great color. Thank you I'm second is with respect to that you had slightly high yield this quarter I don't like you attributed some of that to erode use would you also mentioned pricing strength. I believe are is there any kind of target markets, where you are.
Some pricing up or is it just more of a mix shift or how do we think about that.
Yes, John that's been going on for a number of years as you know second quarter 17 is really when we started a lot of our our price testing, we ensure all of our markets. We remain competitive from a price standpoint, we feel really good about where our nprs had been trending last couple of years.
On the the trend in yield that's obviously a function of those APC ours, but it's also a function of 90 plus.
Versus 90 plus delinquency.
Which reverses out of yield when we get to that 90 day plus point so to the extent we continue to have really positive.
Trends on the back end of our collections in our delinquency buckets that supportive of yield it's a function of product mix and also stable payments and I think all of those have been relatively supportive which is driving the continued stability in our yields we feel really good about.
Great Thanks, guys and congratulations on a quarter.
Thank you.
Our next question comes from line and Eric Wasserstrom, Yes.
Great. Thanks very much.
Yeah.
Maybe just going back to the today investment in the in the centralized operations can you just remind us what functions there was actually take on and sort of how it manifests itself in terms of the.
The operating are typically more specifically rather the.
The cost.
The cost component of the income statement.
Yeah.
So we have.
Large centralized operation that Doesnt number of things traditional lhi. It was focused on collections. After 90 days and then recovery activities over the last year. We've also increased our central sales in servicing team.
And so when I'm, referring to some of the things that are happening in central operations, we've been running test where sometimes we sweep.
Delinquencies earlier than 90 days into central which helps with both overflow.
And it also allows you to do a champion challenger test to see kind of what is more effective. We also have after hours so when somebody applies.
Online and a branches closed rather than waiting till the next day to be contacted by one main they can be contacted immediately perfect their applications schedule to go into a.
Branch, we also have just overflow, calling so for branches busy and there's a lot of people in there and there's more people who want to talk to the brand chicken flip over to our central operation. So we have a whole number of things happening and I think we refer to it as our hybrid model that we've got branch in central they can.
Complement each other and we've also talked about this before one of the great things is should we ever end up in a situation, where we want to ramp up collections that provides quite a bit of overflow, where we can toggle, where we've got a lot branch staff central that we're both trained to do serve it thing in club.
The thing of loans, but also to do collection, which gives us a lot of operational flexibility depending on where the focus is.
Thanks, and then and how do we think about the the accretion of this functionality to the.
To the to the operating leverage.
Yeah. This is Mike that Eric I'll kind of into it. So it's some of what I talked about accretes to portfolio growth right and being able to get to applications quicker with some of our central operations and just pairing that together with our branches to enhance some of that the growth in your.
And it production and receivables growth, we've seen and then of course some of it results in operating efficiency and expense reductions.
We have continued to maintain cost discipline within the company.
Drive these efficiencies one of the things, we'll see that year this year.
Sure Hanchey enhancing our French productivity, which is really a result of what Doug talked about our receivables per branch were up 17%. So somewhat of a cost play, but also more adding receivables without adding that extra dollar expense.
We're also leveraging our scale to reduce third party vendor costs and I'd be remiss, if I didn't say that we're reinvesting these savings in our core technology to be continue to be.
Efficient and invest in our customer experience and enhancements to the business and you'll hear more about this in our upcoming Investor day for sure.
And if I could just sneak in one last clarification on Cecil.
You might can you gave the the DJ impacts, but can you just help me with my arithmetic and what what TC level approximately does that suggest.
Yeah, So Eric we've come a long way from our 17 times leverage.
Feel really good about where we are I want to remind folks that the economics of the business won't change our balance sheet remains strong.
Not ready to give that out at this point.
Okay, great. Thanks very much.
Thanks.
Our next question comes from the line as Moshe Orenbuch of credit Suisse.
Great. Thanks, and given all of those things you talked about with respect to the operating side of their ability to help you group.
Continue to grow loans at <unk>.
Very very healthy rate.
As you get feedback from your customers are there are there other products that you can kind of maybe not completely different products, but the tweaks to this that that could kind of keep that going you know even longer and the things that you're.
Learning that will that will allow.
That groups.
To continue.
Yeah much it's a good question.
And when we spent.
Right a bit of time on.
Our our core product the installment loan and we'll go through some of this at Investor day, the market's been growing and we don't see a reason that it's not going to continue to grow into the future because theres a fair amount of our customers that come in for debt consolidation who are looking.
To get a regular monthly payment that's controllable that can kind of move them out of the cycle of debt as opposed to have a number of credit cards that they hold and so there's been a bunch of conversion from credit cards to personal loans, which is a big market that had quite a bit of room to grow.
We are always looking in asking what else can we do to help our customers because as we spent time with our customers were often.
There for them in a time of need and because we have proprietary underwriting that isn't just a credit score we can help them, sometimes when people who just have more simpler models and not 100 years of experience working with the near Prime customer won't take on that risk and as you see we have good risk adjusted returns.
So.
We're looking at both innovations to our current products that as well as new products. What I would say is over the last years since I've been here. Our main focus has been on strengthening the current business and optimizing it because.
We think there was a lot to be done there and we have a good runway for growth just within the core and I think you're saying you're seeing some of that producing now with that said, we're certainly going to continue to evaluate opportunities to expand our product set in the future great and just on a slightly.
Different attack I mean, there was some questions about specific debt issues, but maybe you could just talk a little bit about the philosophy of kind of managing the right hand side of the balance sheet now given.
Thanks for the capital markets have been pretty.
Pretty favorable and both in terms of spreads and rates, what you might be doing over the next.
Several quarters.
Yeah. Much we are obviously very very happy with our capital markets program. It's been no certainly the markets have been favorable but there's been a lot of effort from the team here one main to really.
To a lot of outreach with our fixed income base, we spend a lot of time with our rating agencies and yeah. We really built quite the program here his and just from a high level point of view.
We've said it before where our goal is to manage and run a conservative and resilient balance sheet.
Long liquidity runway is very very important to us.
We typically issue about a 4 billion here, it's going to be in a mix of ABS and unsecured. So I think our our philosophy is still to have a balanced mix of the too.
Yes has been very very attractive for us as you see from the billion seven we did it at three and 5% I mean, both of those were seven year revolvers, which gives us about an eight year like funds on those those securitization. So we're we're not only getting great rates from ABS. We're also getting tender that doesn't come without without.
Building a program over the years and building relationships with all of our investors. So I think you'll continue to see us use a mix of about half and half that's going to be opportunistic as well. So we will issue when the markets are supportive.
Great. Thanks, so much.
Our.
Our next question comes from line since since Camtek Stephens.
Hey, Thanks, good morning, and so very strong third quarter, and it's principally across the board.
Yes, I'm wondering.
As we're thinking about 2020 sort of are there any particular items in the third quarter on us we're thinking about fourth quarter that are more.
Onetime or so I know you mentioned the losses, maybe a little bit a moderation on the loan growth side, but how should we think about.
2020 from the base of third quarter and then just.
Because you beat so much versus the prior guidance I'm just wondering what.
Changed.
The.
And the actual its versus what you were thinking earlier this year with targets.
Okay. A lot. Thank you Vincent I'll try to unpack that a little bit we did call out the losses as we've talked about the secured mix in the portfolio is moderating.
And very much expectedly. So so we do expect loss improvement to also moderate.
In terms of yields we feel comfortable with our call out on stable yields for the rest of this year.
Not quite ready to give any further guidance on 2020 at this point, we'll certainly do that in the the fourth quarter call.
As we get into the early part of next year.
One item that I did call out in the third quarter was that discrete tax item on a GAAP basis, you will not see that NRC and I results as we use a statutory rate throughout the year for those results but.
22 million certainly is something that we don't expect to return to recur.
That was driven by the release of.
Evaluation allowance on some of our state deferred tax deferred tax assets, which came from a combination of our strong earnings growth.
And our internal continued efforts to streamline our legal entity structure was a big items for the quarter I would call out.
Okay, great. Thank you and.
Yes, when they think about the third quarter and one of the questions have been getting from investors on the strong third quarter results. It's usually when you have the three different things so very strong loan growth very strong yields and lower losses.
Usually you kind of takes two and give a third so.
Sort of a win win yields are our strong it's because underwriting to higher loss rate or when longer the strong maybe give up on something else but.
Just wondering first if it yet.
Comments on you from that and then B. If you could talk about your recent vintage performance helped even too and if you've been underwriting to a different level or its things are consistent. Thank you.
Yes, let me.
Let me start and then Mike that might.
I might add in.
You know I said it before on these these calls which.
We think of growth as an output of running the business, where we're going to market to the customers. We want we're going to underwrite to have.
Loans that meet our risk adjusted return and we're going to try to give people a great customer experience and once they start interacting with us.
They want to book loans with us and so I think.
You are seeing us hitting across a number of variables which is.
Running I think of it as we run a disciplined analytical set a process is to manage a nationwide portfolio of risk and this quarter, you're seeing the output of around.
Both risk and the price that we have for yet risk and the losses they come out of that.
Being the.
Very good and the result of us putting it together and attractive powerful.
Platform, you know I my goal it to.
Continue with that and we don't necessarily say, hey, let's do one and not the other we try to hit on all cylinders and.
We've been doing well the last bunch quarters, and our intention as management is to keep keep driving that and hit around you know again book the right loans with the right risk adjusted returns and growth will be whatever growth is based on auto hitting on all those letters.
Great. Thanks, very helpful and see what the investment thanks very much.
Okay. Thank you.
Our next question comes from one of Rick Shane JP Morgan.
Hey, guys. Thanks for taking my question.
As we head into 2020 in look you guys are demonstrating strong growth in very high returns on capital.
Obviously set you up for potential return of capital I'd love to sort of through the thought process dividend versus repurchase.
And wondering specifically two factors one just cecil impact that calculus in any way.
For example, does it change the characteristic of a potential dividend from a qualified dividend to return of capital on it and also curious if the concentrated position of a sponsor.
Influences that decision at all as well.
Yes, we've.
Talk before about our capital return priorities.
And they they remain the same that we've talked about before which is we have a business the generate excess capital.
Our first priority is going to be do invest in the business to ensure we're serving our customers while innovating and positioning the platform for long term profitability will also invest in growth as long as we see loans that meet our risk return profile and we think have a good return for our investors.
We're going to prioritize the conservative balance sheet with a long liquidity runway and the capital that gets generated an access in excess of that as you've seen this year. We've started to return to shareholders and we plan to continue.
Regarding CFO .
Just repeat what Mike said, especially Ses vis-a-vis capital returns, we have a very strong conservative balance sheet.
We're going to run the company based on the fundamental economics of the business not on the accounting treatment of the business and so Cecil not going to change the way that we think about our capital adequacy, it's not going to change the way that we think about how we're going to invest.
In the business and it's not going to change our ability to return capital to shareholders.
Eric I'll, just I can add to that a little bit just get a little bit more granular weve.
Said before we do we always viewed the combination of our reserves and our tangible equity as our total loss absorption capital or capacity for the business. So sequel doesn't change that because we're just moving up from one account to the other effectively post Cecil implementation, though as a result.
This will begin including reserves net of tax in our leverage calculation, which is consistent with this this thought process and methodology and it's actually a very similar methodology for leverage that used today by S&P.
Got it okay and by the way I agree with you look I think this is just balance sheet geography more than anything else I don't think it changes the ability of the account of the company to absorb losses, but what I'm curious about is for example, it does change the optics in terms of things like book multiple.
And so any post Cecil environment buying back stock is more dilutive to book of because of the geography I'm curious if that type of consideration influences, how you think about repurchase versus dividend.
Well I think I have to go back to the statement that we don't.
See Cecil is changing any of the way, we think about capital adequacy and will be including reserves that are in our our leverage calculation.
As I mentioned in the prepared remarks.
We are back regulatory agencies don't covered our capital levels. So what we need to be mindful of is the rating agencies and how they're thinking about it we've had extensive conversations with the rating agencies about seasonal and of course as I've said before while we cant speak for them directly we are confident that they understand this.
This is an accounting and non economic event and we don't expect any changes in our ratings as a result.
I mentioned S&P sort of specifically already addresses this with the addition of general reserves.
So they're already there and as Doug mentioned as always we're going to continue to prioritize a conservative balance sheet with prudent levels of leverage.
Terrific. Thank you guys very much thanks, Rick.
Our next question comes from the line of Eric Hagen of KBW.
Hi, Thanks, Good morning, guys, some filling in for solar that.
Just a clarification on the leverage is that the target first for six X by the end of the year is that coming down from 6.8 or 6.3 net of cash.
The target for six times on a reported metric.
So what what the Sixthree does this tried to give you a little context around.
Around what the impact of pre funding for growth does to the reported leverage metric, but our six times is based on a reported number.
Okay got it okay, so that liquidity position really should.
Remained strong it's not necessarily coming down dramatically like almost a full turn spindler hearings.
We feel good about where we are we feel comfortable with our year end target for capital.
Liquidity being a little different we continue to enhance our liquidity you saw us increase our conduit capacity in the quarter.
We do caught that cash as liquidity until it's used and also our our unencumbered receivables remain strong at over 8 billion.
Got it okay great.
And then a follow up on the funding side I'm, hoping you can you give just a little bit more color on the feedback that you're actually getting from fixed income investors and the risk appetite to take on longer term assets, especially just considering the stage of the cycle that we're in a.
Realize that your ability to price a seven year deal is.
You know probably at least largely based on the fact is a mix shift this changing toward more secure but in the end I mean do you do you think your ability to get that kind of deal done is is really a function of the fixed income environment that we're in the level of credit spreads or are you guys structuring deals differently and there's some.
Hansman in the deal structure that investors are drawn to.
Okay No there's no change in the structure of our deals I mean, we certainly try to advance as much as we can out of our securitization structures and that remains strong we haven't done anything to soften that at all affected so we've actually gotten more advancement.
Lately over the over the past couple of years.
I think the fixed income markets remain very supportive as I mentioned earlier.
Part of that is just the programs we sell we've established the level of trust with our fixed income investors and we spent a lot of time on the road.
Telling the story and working with our fixed income investors on on what the platform means and what it can deliver.
I'd say they feel comfortable the markets are supportive like you're seeing a lot of flows into the high yield sector I.
I would probably say that those are the issuance and the appetite for risk on that side is leaning a little bit more to the double b credits. So.
We're in a good position there and we're obviously as everyone has figured out on the fixed income side, a very strong platform and one that theyre interested in continuing to do.
A lot of investment in and especially on the longer terms.
Got it puts helpful color. Thank you very much.
Thank you.
Our next question comes from the line of John Rowan Jamie.
John Your line is open make sure you're not on mute.
Can you hear me now.
Yeah. Good morning, we continue sorry about that I had my is limited.
Mike can you give the seasonal impact on the detail I didn't get a written down can you just repeat that.
On the DTA.
Yes asset yeah, and timing put up your reserves are going to have an offsetting deferred tax asset just due to the nature of when you can take.
Charges against income when you can't so our statutory rate is around 24%, so thats where were assuming.
Okay, and then that just to be clear the day, one impact for the reserve build does not go through the PEO correct correct.
And then next.
Okay, and then just lastly, any thoughts on maybe 539, whether you will see incremental volume out of California. That's it for me. Thank you.
Thanks, John Yeah look.
85, 39, the bill in California that cap lending at 36% was the bill that we publicly supported and the main reason we publicly supported it because we believe it's the right thing for our customers.
We already in California, and other states that did not have an interest rate caps, we already voluntarily kept our rate at 36%. So it didnt change our pricing, but we think thats a good responsible thing to do for.
Customers.
You may recall that as part of the one main springleaf merger, we sold a number of our California branches. So we'd been generally underpenetrated in California, and we've been opening branches across the state over the last couple of years.
So we do think there's some opportunity to gain market share, but it's too early to actually size the opportunity.
Okay. Thank you.
Thanks, John .
Our next question comes from the line of and Cyganovich City.
Thanks.
Just touching on the comments you made about improving the customer pull through.
And I guess in combination with higher growth percentage that you're having I know you said, you don't really manage to growth but.
Yes folks that have been through credit cycles.
When you see higher growth in your about customer pull through immediately machine a little bit worried about credit.
What's what gives you comfort that you're not going through customers that maybe you should have.
You know we're pulling through the same customers. We always were so we run it we have a disciplined to analytical process that we run.
We continue to make adjustment.
Based on our risk adjusted hurdle, so we will make adjustments at the edge is.
Growth in our secured.
Portfolio is a form of credit tightening because it generates lower credit losses, and more stable portfolio profile performance.
Over time so.
You know we feel good that we run a portfolio of risk and return.
We know this customer Wow, we've got world class underwriting more of our portfolio has been going to secured.
Over the last couple of years.
And so we monitor macro trends our customers, we've got unique competitive advantage where.
We actually do Paul surveys of our branch managers to see if theres anything happening in a local economy. So.
As I've said before we're not targeting growth, we target running our business very well across all the drivers whether it marketing the customer experience, but all of it needs to fit within our credit box and we feel really good about that we're booking high quality.
Yup.
Okay. That's helpful. Thanks, and then maybe in terms of your.
Employee costs.
Very tight labor market and I think historically, there's been no turnover in some of.
Industries.
Fully base are you having.
Any challenges in terms of getting employees or how are you are you.
Thinking about the cost of managing the business that from that standpoint.
Well look I think.
Any business needs to be in obsessed with its employees and needs to be a great place to work and all the longitudinal studies show if your employees.
Thank you are providing value to customers and they think theres career growth opportunities there and they think the company respect them and pay them a fair wage.
And get them opportunity for advancement.
That you have lower turnover you attract more employees, especially we have a 10000 employee base. So word of mouth is a big and referrals is a big part and the studies show that you actually have happier customers, who are served better in a better run company over time, So I am very focused on.
Our employees our employee value proposition.
Our attrition has actually been going down in the last year.
Because we're very focused on that we think we pay people.
Fairly.
We think we have a great culture, where people feel like we do the right thing for customers and treat them well and we're always looking to improve our management and they feel good about the direction of the company. So glad you asked the question I've got a lot of passion about focusing on our employees from the senior folks all the way down at the front line.
Folks.
Dealing with.
With our customers and our attrition actually has been going down because we've been hitting on all cylinders around.
Making sure we weren't replacement work.
Okay. Thank you.
Our next question comes from the line of Mike Grondahl of Northland Securities.
Hi, Thanks, guys.
Kind of describe your incremental marketing efforts that are kind of pushing a little bit better conversion and maybe what you're doing with Dan data analytics. So we can understand those better.
Sure no.
November Twentyth come to our Investor Day, we'll give you a bunch more but on a on a call look we've got a number of.
Customer acquisition channels, we've got a big direct mail program, we work with a number of affiliates and partners. We've got digital efforts and across all of those you know, we're making sure that we target the right customers, meaning the customers that meet our risk return profile.
We're getting to them, we're always running tasks.
So in service in our mailings.
How we do banners online and what advertising, we're picking up online what the messaging to make sure people understand our value proposition. So there's a lot of things on the outbound that we're spending time on an analytics strides.
Really all of that and we've got a lot of on us customer data and as we run tests were continually testing and learning and refining the outbound.
One someone hit but there's a whole that of activities, whether it's on the phone in person or them going to our website that matters and I've talked about our streamline loan application, making sure it's easy.
To.
Apply with us, but the instructions are clear that can pre populate as much as possible to making it.
Easier on folks and then to the point of when a customer sitting in front about making sure. We have very good technology that allows them to see the options. The the pricing see how they can work with us and get through the closing process in an efficient yet extremely thorough way so.
So it's really you know each of those have analytics behind them and a set of art and science and testing that we're continually doing.
That is all we've been spending time and effort on it and it's as you see kind of throughout that process starting to pay off underpinning all of it. Let me remind you is our credit box, which that is whether we'll make a loans you were not.
And.
That is not going to that continually gets tweaked but.
Yes, we're making sure that we have high quality loans when when we book that.
Great. Okay. Thanks, guys.
Thanks, Mike.
Our next question comes from the line of Henry Coffey of Wedbush.
Yes, good morning, everyone and thanks for taking my question.
Well, we go all the way back Yeah, Oh going all the way back to see so.
Is it an oversimplification does so to say when all the dozens of inputs. If all the dozens of inputs you've done a perfect and they freeze and they don't change small assumption.
Is the loss reserve on new loans, essentially going to be 10% to 11%.
Yeah I mean.
What we've put out today for a range and raise really the lots on the portfolio I have not gotten into the the gory details of what the ratio is for new loans versus season versus delinquent, but.
Overall tend to 11% is what the embedded lifetime portfolio loss estimate is.
Again, given the the receivables composition.
The portfolio attributes and the macroeconomic conditions at this point in time.
But but I mean, just to be really simplistic when we run our models right. Now we just have to say well if loans go up 100 than we had 10% to 11% of that number to the reserve and then back into a provision that that's the way instead of thinking about it.
Yes. The reason we gave you a rate a range as a ratio of receivables was to help you with some of that so I would look at it as ratio against the total book.
And then and then on the competitive front you had a big change in California.
Not for you, but for other parties.
You've got.
The banks don't get to just say Oh, it's a matter of geography for the banks, it's a real Cecil as a real problem, whereas with you.
The rate rating agencies, a basically been using primary capital for 20 years.
The basis for all this analysis. So for you know that it's not a big change. So are they are their pockets of competitive opportunities.
Doors that are opening up either because of the change going on in states like California, and maybe you can tell us if there any other states moving in this direction or on the bank Slash regulatory capital front, where where you have some obvious advantages.
Yes look we.
I I think we stack up very well against our competitors and have a very good value proposition I told you about California weed.
In opening branches, there and we're on a path underpenetrated. So we're going to continue to do that.
Hard for me to say on the banks and how it's going to just what they do I can just tell you.
We have.
As you said the advantage of not being a banks are not being mandated to build that regulatory capital back up over the next couple of years Ami and we really are just very focused on running our company based on the economics. So.
I would just refer back to what I said before is.
We're going to provide a great value proposition to our customers with a great employee base, we're going to drive around all the places.
We can to make sure we bring in the customers, we want to book and whether its marketing operations, making sure we keep a disciplined tight credit box.
We feel really good about our our prospects visa VR competitors some of our non bank competitors.
Don't have the kind of funding program and strong balance sheet that we have so we like our positioning and we're going to keep playing our game. We're aware of our competitors, but our plan is to keep running a good business and get good risk adjusted returns for our shareholders.
Are there any states.
That you can point to that Didnt have some form of restriction rate cap or something.
That might be putting one in place.
Over the next 12 to 18 months.
I am not not in particular.
Different state legislatures.
Hi, and different governors and administrations have their ideas, but California was the big one that was on the radar.
Great. Thank you very much.
Our next question comes from mainly of CAD.
Our next question comes from month of Kevin Barker of Piper Jaffray.
My question has been answered thank you.
And thank you ladies and gentlemen, this does conclude todays one main financial third quarter 2019 earnings Conference call. Please disconnect. Your lines at this time and have a wonderful day.